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RATING REPORT

Shafi Lifestyle (Pvt.) Ltd

REPORT DATE: 26th August 2020

RATING ANALYSTS: Talha Iqbal talha.iqbal@vis.com.pk

Madeeh Ahmed madeeh.ahmed@vis.com.pk

COMPANY INFORMATION Incorporated in 2009 External auditors: RSM Avais Hyder Liaquat Nauman

Private Limited Company Chairman of the Board: Muhammad Haleem

Key Shareholders (with stake 5% or more): Chief Executive Officer: Muhammad Naseem Shafi Glucochem Pvt Ltd – 45.4%

Amjad Hafeez – 12.2%

Muhammad Naseem – 11.1%

Tahir Hanif – 7.2%

Muhammad Haleem Sheikh – 6.5%

APPLICABLE METHODOLOGY(IES) Applicable Rating Criteria: Corporates (April, 2019) https://s3-us-west-2.amazonaws.com/backupsqlvis/docs/Corporate-Methodology-201904.pdf

RATING DETAILS

Rating Category Initial Rating

Long-term rating Short-term rating

Entity BBB+ A-2

Rating Outlook Stable

Rating Date 26th August 2020

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Shafi Lifestyle (Private) Limited

OVERVIEW OF THE

INSTITUTION RATING RATIONALE

SLPL was incorporated in 2009,

the company was previously known as

‘Aisha Sons’ partnership firm. The company was later on

renamed and was converted into a

private limited company.

Financial Statements of the company for

FY19 were audited by RSM Avais Hyder

Liaquat Nauman

Shafi Lifestyle (Pvt.) Limited (SLPL) is part of Shafi Group. The group has presence in textile, leather, food and footwear industries. SLPL was incorporated in 2009 as ‘Aisha Sons’ and was subsequently renamed SLPL. The company is principally engaged in manufacturing and selling of leather footwear. The company’s regional office is based in Karachi where as the factory is located in Lahore, Punjab. The Company relies on grid-based electricity for its power requirements.

Shafi Texcel Limited (STL) Incorporated as an unlisted public limited company in 1992, the company is involved in the manufacturing and trading of fabric. Shafi Gluco-Chem (Pvt.) Limited (SGCL) The company was incorporated in 1990 as a private limited company and is involved in the manufacturing and trading of liquid glucose and rice protein. Everfresh Farms (Pvt.) Limited (EFL) The company was incorporated as a private limited company in 2008. The principal activity of the company is farming, dairies, cultivation of food grains, seeds, foods and manufacturing of products associated with the farming interests. Milk Ville The company is engaged in the business of milk pasteurization. EverFresh Meat The company is engaged in processors and exporters of chilled meat (Mutton and Beef)

Shafi Group

Muhammad Shafi Tanneries

(Pvt) Ltd

Shafi Texcel Ltd

Shafi Gluco Chem (Pvt)

Ltd.

Everfresh Farm (Pvt.) Ltd

Milk Ville Ever Fresh

Meat

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SLPL’s Product portfolio

The company’s product portfolio is focused towards high-end fashion segment and caters to

both men and women. Product portfolio includes ankle boots, ballerina shoes, coat shoes,

driving moc, long boot, saddle shoes and wedge shoes. SLPL primarily relies on cow leather for

manufacturing shoes which is entirely procured from the local market. Products are made to

order on the specific instructions of the client. The Company has a team of 6 designers that

support in product development.

Leather exports after a period of consistent decline have recovered in FY18 and FY19

Commodity Unit FY15 FY16 FY17

Qty Value Qty Value Qty Value

Leather Footwear

'000' Pairs 6,919.0 109,761.0 5,744.0 89,151.0 5,339.0 81,384.0

AUP/Pair

15.9

15.5

15.2

FY18 FY19 FY20

Qty Value Qty Value Qty Value

'000' Pairs 6,018.0 95,150.0 7,008.0 106,464.0 6,708.0 107,170.0

AUP/Pair

15.8

15.2

16.0

Pakistan’s footwear export volumes after a period of consistent decline have recovered in FY18

and FY19. Footwear export volumes continued growth trajectory till 8MFY20 but were

impacted in the last 4 months due to Covid-19. Despite the decline in footwear export

volumes, footwear exports increased in dollar terms due to higher average selling prices. The

footwear exports industry in the country comprises 7 to 8 major players with the single largest

player dominating the market and constituting over half of the total exports. Leather footwear

industry is labor intensive and enjoys availability of quality leather from the local finished

leather industry at competitive rates. Major competing markets include India, Bangladesh,

Indonesia and Cambodia.

Continuous capacity enhancement with the plant consistently operating at high

capacity utilization levels

Capacity Utilization

Units FY16 FY17 FY18 FY19 FY20

Installed Capacity Pairs 300,000.0 300,000.0 456,000.0 456,000.0 525,000.0

Actual Production Pairs 299,473.0 282,459.0 440,101.0 443,922.0 520,768.0

Capacity Utilization 99.8% 94.2% 96.5% 97.4% 99.2%

Over the last four years, the Company has consistently enhanced installed footwear

manufacturing capacity which is expected to more than double in the ongoing year. As at end-

FY20, the company’s cumulative installed capacity stands at around 525,000 units of shoes per

annum. SLPL is currently undergoing expansion with installed capacity projected to increase to

720,000 units of shoes per annum in the ongoing year. Over the medium term, the

management plans to expand the installed capacity to 1 million units of shoes per annum.

Historically, the plant has operated at high capacity utilization level which has resulted in

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economies of scale for SLPL. The Company’s ability to operate at high capacity utilization

levels despite significant expansion is considered important from a rating perspective.

Financial Profile

Healthy sales growth on the higher volumes sold and increase in prices

Sales of the company have grown at a 4 year Compound Annual Growth Rate (CAGR) of

46.5% from FY16-FY20. Net Sales of the company grew by 33.3% in FY20 (FY20: Rs. 1.4b;

FY19: Rs. 1.1b; FY18: Rs. 0.7b). The increase in net sales was a function of increase average

selling price (22.1%) and growth in volumes (16.4%). Sales are primarily geared towards export

market and in ladies footwear segment. Focus on high end fashion is reflected in Company’s

average prices of footwear exports being higher by around 20% vis-à-vis Pakistan’s average

export price. Client and geographic concentration in sales is on the higher side. As per

management, this is a part of a deliberate strategy to focus on target market where business &

growth prospects are sound and timely payments are received from client.

Volumetric growth in sales and increasing margins have resulted in improvement in

profitability profile

SLPL’s gross profit has grown overtime till FY19 and has consolidated to similar levels in

FY20. Growth in margins (FY18: 15.6%; FY19: 26.1%; FY20: 24.1%) is attributable to

realization of economies of scale due to increase production efficiencies (due to higher

production volume), increase in average selling prices due to currency devaluation and shift

towards value-added products. Overall profitability improved due to increase in revenues and

improvement in margins. Moreover, decline in selling and distribution expenses due Covid

related travel restrictions supported bottom line. Going forward, increase in profitability will be

a function of volumetric growth in sales over the rating horizon.

Healthy growth in cash flows support liquidity profile; working capital cycle necessities

utilization of short-term borrowing. While remaining within manageable levels,

leverage indicators are expected to remain within manageable levels.

Given the improvement in profitability, funds generated from operations have increased and

was reported at Rs. 308.3m (FY19: Rs. 96.5m). Debt carried on balance sheet is primarily long-

term in nature with limited utilization of short-term funding. However, working capital

requirements are extensive given sizeable inventory holding period along with upfront payment

for imported raw material (represents around of total cost of sales) while sales proceeds are

realized in 2 months. Ageing profile is considered satisfactory with no receivable being overdue

for more than 90 days. Working capital requirements have been funded through interest free

payable from associates which amounted to Rs. 342.7m (FY19: Rs. 371.9m). Given the

improving cash flows, management plans to gradually retire the amount. Moreover, working

capital requirements are planned to be funded through funds raised from SBP’s export

refinance scheme. Resultantly, leverage indicators are expected to increase but will continue to

remain within manageable levels. Capital expenditure requirements are modest and can be

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funded through internal cash generation.

Corporate governance framework has room for improvement The Company has a formal board structure which primarily includes family members.

Moreover, an executive committee has also been constituted where discussion regarding future

strategy, business environment and funding needs is undertaken. The Company currently does

not have an in-house internal audit function but plans to hire separate resources over the same.

SLPL has two separate modules for accounts & finance and inventory management.

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Financial Summary (amounts in PKR millions) Appendix I

FY16 FY17 FY18 FY19 FY20

BALANCE SHEET

Fixed Assets 146.9 165.9 277.9 289.6 395.3

Other Non-Current Assets 5.3 5.6 3.9 21.5 40.3

Stock-in-Trade 75.5 151.9 175.2 219.6 285.3

Trade Debts 78.2 41.8 143.3 281.2 368.0

Cash & Bank Balances 12.8 38.4 15.7 19.5 125.2

Total Assets 423.2 512.0 814.5 1,034.7 1,467.5

Trade and Other Payables 110.1 102.9 174.0 202.6 262.8

Long Term Debt (including current maturity) 38.9 32.3 22.0 13.6 72.8

Short Term Debt - - - - 8.0

Total Debt 38.9 32.3 22.0 13.6 80.8

Total Liabilities 329.9 396.7 618.7 594.4 770.8

Paid-Up Capital 374.3 374.3 374.3 374.3 374.3

Total Equity (without surplus revaluation) 93.3 115.4 101.4 346.2 602.6

INCOME STATEMENT

Net Sales 316.8 302.4 717.1 1,094.9 1,460.0

Gross Profit -104.5 -6.4 112.0 285.9 351.6

Profit Before Tax -140.5 -53.0 -4.3 101.2 284.2

Profit After Tax -143.6 -52.7 -13.0 92.3 265.4

RATIO ANALYSIS

Gross Margin (%) -33.0% -2.1% 15.6% 26.1% 24.1%

Net Profit Margin -45.3% -17.4% -1.8% 8.4% 18.2%

Net Working Capital (24.3) (30.6) (69.5) 135.5 321.7

Current Ratio 0.9 0.9 0.9 1.2 1.5

FFO (123.9) (39.1) 15.4 96.5 308.3

FFO to Total Debt (%) -318.6% -121.0% 69.7% 707.9% 381.6%

FFO to Long Term Debt (%) -318.6% -121.0% 69.7% 707.9% 423.5%

Debt Servicing Coverage Ratio (x) - (3.1) 1.4 6.1 14.4

ROAA (%) 0.0% -11.3% -2.0% 10.0% 21.2%

ROAE (%) 0.0% -50.5% -12.0% 41.2% 55.9%

Gearing (x) 0.4 0.3 0.22 0.04 0.1

Leverage (x) 3.5 3.4 6.10 1.72 1.3

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ISSUE/ISSUER RATING SCALE & DEFINITIONS Appendix II

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REGULATORY DISCLOSURES Appendix III

Name of Rated Entity Shafi Lifestyle (Pvt.) Ltd

Sector Leather

Type of Relationship Solicited

Purpose of Rating Entity Rating

Rating History Rating Date

Medium to Long Term

Short Term Rating

Outlook Rating Action

RATING TYPE: ENTITY 26/08/20 BBB+ A-2 Stable Initial

Instrument Structure N/A

Statement by the Rating Team

VIS, the analysts involved in the rating process and members of its rating committee do not have any conflict of interest relating to the credit rating(s) mentioned herein. This rating is an opinion on credit quality only and is not a recommendation to buy or sell any securities.

Probability of Default

VIS’ ratings opinions express ordinal ranking of risk, from strongest to weakest, within a universe of credit risk. Ratings are not intended as guarantees of credit quality or as exact measures of the probability that a particular issuer or particular debt issue will default.

Disclaimer

Information herein was obtained from sources believed to be accurate and reliable; however, VIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. VIS is not an NRSRO and its ratings are not NRSRO credit ratings. Copyright 2020 VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to VIS.

Due Diligence Meetings Conducted

Name Designation Date

1 Mr. Zahid Haleem CFO-Shafi Group 11/08/20

2 Mr. Hamza Hafeez Executive Director 11/08/20

3 Mr. Mustafa Hafeez CFO 11/08/20